The Playbook - January 14, 2019

January 14, 2019 • Playbook


The Playbook

Weekly Commentary – January 14, 2019

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy

Please click here to listen to Richard Wylie's audio version.

A PDF version of The Playbook is also available for download.

Economic Calendar

Date Release Period Consensus Previous
January 14 New Home Sales November 18 3.0% -8.9%
January 16 Retail Sales December 18 0.5% 0.2%
January 17 Housing Starts December 18 1.330M 1.256M
January 18 Industrial Production December 18 0.4% 0.6%
January 18 Inflation Rate December 18 2.3% 1.7%

Key Earnings:
January 14: Citigroup Inc., Limoneira Co., Polarity TE Inc., Renasant Corp.
January 15: Delta Air Lines Inc., IHS Markit Ltd., Kinder Morgan Inc., Wells Fargo & Co.
January 16: Bank of New York Mellon Corp., CSX Corp., PNC Financial Services Group Inc.
January 17: Atlassian Corp. PLC, Fastenal Co., Netflix Inc., WNS (Holdings) Ltd.
January 18: Citizens Financial Group Inc., Schlumberger Ltd., State Street Corp., VF Corp.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian trade deficit widens to six-month high
Updated figures from Statistics Canada revealed a $2.1 billion merchandise trade deficit in November, more than double the $851 million figure recorded in October and the widest monthly deficit since May ($3.0 billion). Much of the widening can be traced to weaker trade in energy products. Exports of crude oil tumbled 17.7%, driven by a 13.9% drop in prices, which fell for a third straight month. Only three of the eleven major sub-groups reported a monthly gain in exports, with industrial machinery, equipment and parts leading (+3.3%). Nevertheless, barring another doubling in the trade deficit in December, 2018 will have seen the smallest trade deficit since 2014, when Canada’s trade balance was last in a surplus ($4.7 billion). Interestingly, the U.S. Department of Commerce was unable to report the corresponding U.S. data, due to the ongoing partial shutdown of the federal government.

Bank of Canada cuts forecast
The Bank of Canada met market expectations by leaving administered interest rates unchanged at their latest monetary policy announcement window. However, the press release that accompanied the announcement dwelt significantly on the weakness in oil prices that emerged following the publication of their quarterly Monetary Policy Report (MPR) in October. The bank states that “the drop in global oil prices has a material impact on the Canadian outlook.” Accordingly, their January MPR reflects downward revisions to GDP growth estimates for both 2018 (to 2.0% from 2.1% in the October forecast) and 2019 (to 1.7% from 2.1%). Similarly, expectations for the consumer price index (CPI) were also cut for both 2018 (to 2.3% from 2.4%) and 2019 (to 1.7% from 2.0%). Despite the scale of these revisions, the statement explicitly reaffirms that “the policy interest rate will need to rise over time into a neutral range to achieve the inflation target.” Still, the possibility that the bank will remain on hold for an extended period, or even move to lower interest rates remains, and the market will continue to closely scrutinize the economic data.

Euro area unemployment drops to decade low
The latest employment figures from Eurostat, the statistical office of the European Union, revealed that the number of unemployed workers in the euro area dropped by a significant 90,000 to 13.04 million in November. The monthly data showed that joblessness neared pre-financial crisis levels, as the unemployment rate unexpectedly fell to 7.9% (seasonally adjusted) in November, following a downwardly revised 8.0% recorded in October. It was the lowest level since October 2008 and comfortably below market consensus of 8.1%. Compared to November 2017, the number of unemployed fell by 1.14 million. Meantime, the unemployment rate for the 28-country European Union (EU28) stood at 6.7% in November, unchanged from October’s reading and down from 7.3% a year ago. This remained the lowest jobless rate recorded in the EU28 since the start of the European Union monthly unemployment data series in January 2000. With unemployment in the euro area falling to its lowest level in over a decade, there is an indication that slowing economic growth has yet to derail the 19 single-currency countries’ labour markets. In addition to the European Central Bank’s decision to halt its €2.6 trillion quantitative easing program at the end of 2018, these data will reinforce policy makers’ expectations that an increasingly tight labour market will help fuel wages and ultimately inflation.

Longer View

It will likely take some time for central banks to normalize interest rates and unwind the quantitative easing that has added trillions of dollars to central banks’ balance sheets. Growth rates for loans will slow significantly because of the unwind likely causing economies to grow at below-average rates. Valuations for stocks are fair and expected returns are positive although overall markets are unlikely to deliver double-digit returns over the next decade. Companies that have solid balance sheets will likely outperform. Recent volatility and general noise in the market can represent a material distraction and may discourage investors. Working with a financial advisor will ensure your portfolio is optimized and continues to meet your needs.

Weekly Summary

January 7
Destatis, the Federal Statistical Office of Germany, reported that factory orders dropped 1.0% (seasonally adjusted) in November. This followed a downwardly revised 0.2% increase in October (originally reported as 0.3%) and was the first monthly decline in factory orders recorded since July. This was primarily due to a 3.2% decrease in foreign demand as new orders from the euro area declined 11.6%, which more than offset a 2.3% increase in demand from other countries. Meantime, domestic orders were up by 2.4%. These results were far below market expectations; however, the orders data indicate that the slowdown in German manufacturing may soon be concluded.

Eurostat, the statistical office of the European Union, reported that retail sales in the euro area were unchanged (seasonally adjusted) in November, following an upwardly revised 0.6% growth in October (originally reported as 0.3%). Regionally, sales were dominated by a 1.4% jump in Germany, while France and Spain saw more moderate gains of 0.1% and 0.5%, respectively. Accordingly, annual growth, which stood at an upwardly revised 2.3% in October (originally reported as 1.7%), more than halved to 1.1% in November. However, the monthly figures were much stronger than expected. These results likely suggest a much healthier contribution from the household sector to fourth-quarter real GDP growth.

The Institute for Supply Management announced that its Non-Manufacturing Index recorded a 57.6 reading in December. It was down 3.1 points from the 60.7 level registered in November but remained above the key 50.0 (generally expanding) level for a 107th consecutive month. This figure is below consensus expectations. This result indicates continued growth, but at a slightly slower rate in the non-manufacturing sector.

January 8
Statistics Canada announced that Canada's merchandise exports fell 2.9% in November, mainly on lower crude oil exports, while imports decreased 0.5%. As a result, Canada's merchandise trade deficit with the world widened from $851 million in October to $2.1 billion in November. With the market looking for a deficit in the $2 billion range, these results are in line with consensus estimates. They are a negative sign for overall GDP growth.

The Australian Bureau of Statistics announced that the country’s trade surplus narrowed to A$1.93 billion (seasonally adjusted) in November, from a downwardly revised A$2.01 billion in October. November exports increased by 1.0% from a month earlier to an all-time high of A$38.45 billion, as sales of non-monetary gold increased by A$681 million (+60.0%). November imports jumped 2.0% to a new all-time high of A$36.52, slowing from an upwardly revised growth of 3.4% in October. The trade surplus results were below market expectations of a A$2.23 billion surplus. The weaker trade figures will likely dampen fourth-quarter GDP results.

The European Commission reported that the Economic Sentiment Indicator (ESI) for the euro area decreased to 107.3 in December, following a 109.5-point reading in November. This was 2.2 points short of its November mark, nearly 8.0 points below its reading a year ago and the lowest level since December 2016. The ESI for the euro area has now posted its twelfth consecutive monthly decline, its worst run since 2008-09. These results were below market consensus. Although December’s ESI remains constant with positive economic growth, its downtrend throughout 2018 makes it appear that a pick-up in momentum is unlikely to occur in the beginning of 2019. This may cause inflation in the euro area to stagnate around the 1.0% mark.

January 9
The Canada Mortgage and Housing Corporation announced that housing starts totalled 213,900 units (seasonally adjusted annual rate) in December. This is down 4.9% from the upwardly revised 224,349-unit level in November (originally reported as 215,941) but is up 0.3% compared to the December 2017 level. The drop in housing starts was led by multiple urban starts (-6.8%). With the market braced for a larger decline, these results are above market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Eurostat, the statistical office of the European Union, reported that the number of unemployed workers fell by a substantial 90,000 to 13.04 million in November. Accordingly, the unemployment rate in the 19-country euro area fell to 7.9% (seasonally adjusted) in November, following a downwardly revised 8.0% recorded in October. These results were comfortably below market expectations of 8.1% and the jobless rate was the lowest since October 2008. Meantime, the unemployment rate for the 28-country European Union (EU28) stood at 6.7% in November, unchanged from October’s reading and down from 7.3% a year ago. This remained the lowest jobless rate recorded in the EU28 since the start of the European Union monthly unemployment data series in January 2000. Despite the sizeable decrease in unemployed workers in the euro area, the data from the previous three quarters show that the unemployment figures remain consistent with a decelerating trend in economic growth.

The Bank of Canada announced that it was holding the target for its key overnight interest rate steady at 1.75%. The bank rate was left at 2.00% and the deposit rate remains at 1.50%. The press release that accompanied the announcement focused on the weakening in world oil prices since the bank last published its quarterly MPR in October. In addition, the bank reduced GDP estimates for 2018 and reduced its forecast for economic growth for 2019. The decision to leave interest rates unchanged was in line with market expectations. The next policy announcement is scheduled for March 6, 2019. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

January 10
The U.S. Department of Labor announced that initial jobless claims totalled 216,000 (seasonally adjusted) in the week ending January 5, a decrease of 17,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 233,000. The four-week moving average was 221,750, an increase of 2,500 from the previous week's revised average. The previous week's average was revised up by 500 to 219,250. These results are stronger than consensus estimates.

Statistics Canada reported that building permits issued by Canadian municipalities rose 2.6% to $8.3 billion in November, sufficient to erase October’s 0.5% decline. Six provinces posted increases, led by New Brunswick (+19.5%). Newfoundland and Labrador (-65.2%) reported the largest decline. Nationally, construction intentions were mixed with residential declining 2.5% and non-residential rising 11.6%. On a year-over-year basis, permits are now up 6.6%. These results are stronger than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

Statistics Canada also announced that its New Housing Price Index (NHPI) was flat for a fourth consecutive month in November. On a year-over-year basis, the index is unchanged. These results are in line with consensus expectations and suggest virtually no gains in net worth for homeowners.

The National Bureau of Statistics of China reported that consumer prices were unchanged in December (monthly basis), after falling -0.3% in November. On a year-over-year basis, the CPI slowed to a six-month low of 1.9% in December (also 1.9% in June), down from 2.2% in November. Non-food prices eased to 1.7% in December, down from a 2.1% increase in November, primarily due to a fall in transportation costs (-0.7%) and health care prices (2.5%). Annual core inflation, which excludes volatile food and energy prices, remained level at 1.8%. Considering calendar year 2018, the inflation rate increased to 2.1%, following a 1.6% rise in 2017 and missed the government’s target of around 3.0%. The overall figures were weaker than market consensus.

The National Bureau of Statistics of China reported that, on a year-over-year basis, the producer price index (PPI) increased 0.9% in December, slowing sharply from 2.7% in November. On a year-over-year basis, the decline in the PPI inflation was driven by prices of production materials, up only 1.0%, after increasing 3.3% in the previous month. Additionally, prices of fuel and power also fell drastically to 3.8% in December, following a 7.9% increase in November. On a monthly basis, producer prices fell 1.0% in December, after a 0.2% decrease in November. The overall results were well below market consensus.

Statista, a central European statistics agency, reported that France’s industrial production experienced a 1.3% decline in November 2018, reversing an upwardly revised 1.3% advance in October. On a year-over-year basis, production declined 1.2% and manufacturing output fell 1.4%. The monthly reversal was driven by a 10.6 % slump in the manufacture of coke and refined petroleum products. However, decline was widespread, also hitting the manufacture of cars, machinery, pharmaceuticals, chemicals and metals. This report is weaker than consensus expectations.

January 11
The U.S. Bureau of Labor Statistics reported that the consumer price index decreased 0.1% (seasonally adjusted basis) in December. Over the last 12 months, the index increased 1.9%. These results matched consensus expectations. These figures suggest that inflationary pressures remain muted and will raise questions with respect to the Federal Reserve’s ongoing tightening of monetary policy.

The U.K. Office for National Statistics reported that GDP increased by 0.2% in November (month over month), up from 0.1% in October. However, on a rolling three-month basis, growth slowed to 0.3% from the 0.4% in the three months to October. It is the weakest growth in six months. The single-month reading for November was marginally higher than expectations. At the same time, industrial production in the U.K. decreased by 0.4% in November of 2018 (month over month), following a downwardly revised 0.5% decline in October. In the three months to November, total output decreased by 0.9% compared with the same period in 2017; this is the weakest growth in total production output since August 2013 and the first time since October 2012 there has been widespread weakness across all sectors. This report was weaker than expected.

The U.K. Office for National Statistics announced that the country’s international total trade deficit in goods and services narrowed £0.1 billion (seasonally adjusted, monthly basis) to £2.9 billion in November, following a downwardly revised £3.0 in October. Total exports rose 0.4% to an all-time high of £54.0 billion, advanced by an increase of 1.2% in sales of services, while goods exports fell 0.3%. Total imports ticked up 0.1% to £56.9 billion, driven by a 0.5% rise in purchases of services, while goods imports remained level. The U.K.’s trade in goods deficit with the EU narrowed £1.6 billion in the last year, however, these figures were nearly offset by a £1.3 billion increase in the deficit with non-EU countries. The trade deficit was considerably larger than market expectations.


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